If you are already self-employed, or thinking about it you must ensure that you manage your money daily. Self-employment means that you no longer have that regular weekly or monthly pay cheque coming in, so money management is paramount to keep things balanced. Cash flow is the single biggest issue that small businesses (and sometimes larger ones) fail on – something in the region of 50% according to the UK Insolvency Helpline.
Keep an eye on cashflow – it has nothing to do with profitability. If all the money owed to you is added to the value of your stock, your financial position might look healthy – if you don’t have sufficient cash in the business to meet other demands, you could easily become insolvent.
Put together a cash flow for a fixed period. At the end of that period check to see how the figures compared to your forecast. If you have variances, consider what they are, what caused them – if you have longer term projects, you may want to ask customers for stage payments rather than having to wait right until the end before you get paid. If you have a good trading history, your bank may help, but they will be asking questions of you, so be prepared.
How can a bank help? Make yourself know to the business banking staff, develop a dialogue with them and build relationships. Banks are a source of finance and one of the following options may be right for your needs:
- An overdraft facility with set limits at competitive interest rates.
- A short-term borrowing facility so that you can draw down a specific amount to be repaid in a specified number of days.
- A revolving credit facility to enable you to make withdrawals at short notice and unscheduled repayments whenever you have a cash surplus.
- Fixed term loan – at a fixed or variable rate. It’s not only banks that can offer these – building societies, credit companies and Government backed departments such as the Start Up Loan Company (if you are still within your first two years of trading) or other financing options. Many start up and existing business are turning to peer to peer lending to generate income to support growth and innovation.
- Invoice factoring involves selling your invoices to a third party. In exchange they process the invoices. These third parties are called factors or debt factoring companies.
How to keep a manual cashbook
How to keep a purchase and sales ledger
Documents that you must keep
When setting your business up – or when you are established you may need specialist advice at some point. The following is a list of issues that may require professional help:
- Advice on changing your company structure
- Template contracts and advice on contracts of employment
- Advice on leasing a property
- Assistance with cashflow and debt recovery
- Tax returns and tax planning
- Insurance for premises and people
- Licence Agreements
- Directors’ Agreements
- Contingencies for disputes and problems
- Expertise to raise capital
- Intellectual property – e.g. patenting, trademarking, copyright
- Advice on personal guarantees for loans
Develop and build your own networks
Self-employment as an individual business owner can be a lonely road to start with. Get support networks around you – whether they be individuals or groups – face to face or online. Use them as sounding boards for new ideas, support in making decisions and sometimes to help in a crisis. Networking is also a very cost-effective way of expanding your client base.
Benchmark your business against your competitors and/or comparative sized businesses. By making comparisons you can identify areas where you could improve your business. ‘Mystery shopping, reviewing competitors’ literature, their websites and reviewing what they are doing and saying through advertising, social media etc are all useful ways of picking up on good/bad practices.
As you grow, you will need to make a number of important decisions about how you wish to operate your business going forward. If your business grows and becomes more profitable you may want to consider becoming a Limited Company. This will give you added protection should your business run into trouble – as a sole trader, running up debts may require you to sell your house or other assets to cover them. A Limited Company enables you to split your personal and business finances – talk to your financial adviser who will advise if and when this would be a good move.
Growth may mean you need to move to larger premises. Planning for a move will require you to consider a number of things:
- Size/floorspace and layout
- Suitability for now and future growth
- Lease or purchase
- Parking, access to public transport or major routes
- Planning and health and safety
Talk to commercial property agents, your local authority and Economic Development Team who can help.
You may also need to recruit staff – consider whether you will employ or source freelance. Consider the pros and cons – financially and culturally. Affordability will be key and you will need to go back to your cash flow forecast to assess the viability of employing people. Don’t overlook the legal aspects that come from employing people as well as the health and safety issues. Here is a list of potential contacts who will help you ensure that you have the right policies and procedures in place and can offer ongoing guidance and support should you need it.
Customers and Managing Them
Many small businesses start out with either one or two, or a small handful of customers. Within that mix there is often one major customer who sustains that small business in the early months and sometimes years of trading. If that sounds like you, then you should consider your position and the risk to the ongoing viability of the business should that customer become unstuck or the relationship changed in some way. Having all your eggs in one basket is a risky strategy, even if that one customer has an excellent relationship with you and is providing all the income you need. You should also consider this dependency in the context of your cashflow and time management.
Diversification in what you do and sell is one option to consider i.e. if you are a domestic window cleaner, could you explore industrial cleaning as a related business activity that could be relied upon if your domestic window cleaning started to dwindle. There may be costs involved, of course, i.e. heavier duty cleaning equipment and possibly training, but looking for new markets and what that entails is something that all businesses should be doing.
So, the key things to remember are:
- Keep an eye on cashflow.
- If there are signs that your business may be in trouble, revisit your cashflow forecast and speak to your bank or accountant. Insolvency practitioners are also a useful point of contact and can often help to avert disasters.
- Find out what overdraft facilities are available to help through the cash shortfalls.
- Seek out mentors and networks.
- Benchmark your performance against your competitors.
- When planning growth, seek advice on employing staff, company restructuring and moving premises.
- Make best use of your time and develop a mix of customers.
- Give yourself planning time on a regular basis so that you can easily respond to market changes.
Written by Lou Cessford, Nwes Business Advisor